Competition and Manipulation in Derivative Contract Markets
59 Pages Posted: 2 Jul 2019 Last revised: 5 Jul 2019
Date Written: July 1, 2019
This paper develops methods and metrics for quantifying manipulation risk in cash-settled derivative contract markets. I show how to estimate market participants' manipulation incentives, and predict manipulation-induced market distortions, using commonly observed market data. I develop a simple manipulation index, which can be used as a diagnostic metric to detect potentially manipulable contract markets, similar to the Herfindahl-Hirschman index (HHI) in antitrust settings. I apply these methods to estimate manipulation risk in a number of contract markets.
Keywords: derivative contracts, manipulation, regulation
JEL Classification: D43, D44, D47, G18, K22, L40, L50
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